Tuesday, July 31, 2018

Opportunity Zones are designated low-income areas like Newark, N.J., Stockton, Ca., and Montrose County, Co.; soon investors will be able to pour realized capital gains into companies and projects based there.--FORBES

"I remember so many kids with amazing potential who died on the vine," U.S. Senator Timothy Scott says as he surveys the shuttered Chicora Elementary School, where weeds climb the walls and graying plywood shields shattered windows. "The frustration, irritation and low expectations were so pervasive here that I always wanted to make a difference."

He now may get his chance. Today's visit is less a grim walk down memory lane than a legislative victory lap for Scott and peripatetic tech billionaire Sean Parker, The unlikely pair are core members of an even more unlikely group of conservatives and liberals, capitalists and philanthropists, U.S. lawmakers and small-town mayors who have successfully created one of the greatest tax-avoidance opportunities in American history, in the service of underperforming American cities and neighborhoods.

For all the focus on drastic tax-rate cuts, the fate of the state and local tax deduction and the exploding federal deficits, it's the least-known part of last year's tax-cut law that could be the most consequential. Officially called the Investing in Opportunity Act, it promises to pump a massive amount of cash into America's most impoverished communities by offering wealthy investors and corporations a chance to erase their tax obligations.

Too good to be true? "The incentive needs to be powerful enough that it can unlock large amounts of capital, aggregate that capital into funds and force the funds to invest in distressed areas," says Parker, the original Facebook president whose think tank, the Economic Innovation Group, created the policy and helped press it into law. "Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed."

The heart of this new law: Opportunity Zones, or "O-zones," low-income areas designated by each state. Investors will soon be able to plow recently realized capital gains into projects or companies based there, slowly erase the tax obligations on a portion of those gains and, more significantly, have those proceeds grow tax-free. There are almost no limits. No limits on how much you can put in, how much tax you can avoid and, for most of the country, the types of taxes you can avoid, whether federal, state or local. No limits on how long those proceeds compound tax-free. And precious few limits on what types of investments you can make.